Macroeconomics Final Exam

The multiplier in a country is equal to 5, and households pay no taxes. At the current equilibrium real GDP of $14 trillion, total real consumption spending by households is $12 trillion. What is real autonomous consumption in this country? a. $0.8 trillion b. $2 trillion c. $1.2 trillion d. $11.2 trillion

$0.8 trillion explanation: c = 12 multiplier = 5 From the formula, (1/1-MPC) = 5. Therefore, 1-MPC = (1/5) MPC = 1-(1/5) MPC = (4/5) Hence, from the formula C = A+BY 12 = A+(4/5) x 14 A = 12-11.2 A = 0.8 trillion

Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out. Instead, the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. This means that the crowding out effect, for any particular level of the price level, reduces the quantity of output by: a. $75 billion. b. 40 billion. c. $30 billion. d. $20 billion.

$20 billion explanation: Without crowding out: Total shift of AD=multiplierxGovt. purchases =15x5=$75bn With crowding out: Total shift of AD = $55 bn Extent of crowding out = 75 - 55 = $20bn

The marginal propensity to consume is equal to 0.80. An increase in household wealth causes autonomous consumption to rise by $10 million, initially. By how much will equilibrium real GDP increase at the current price level, the other things being equal? a. $8M b. $2M c. $50M d. $12.5M

$50 M explanation: 1/(1-mpc) * change in autonomous spending = 1/(1-0.8) * 10 = 50 billion

In a certain economy, when income is $100, consumer spending is $60. The Value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is... a. $60.25 b. $60.75 c. $61.33 d. $64.00

$60.75 explanation: 4=1/1-MPC MPC=1-1/4 MPC=3/4 MPC=.75 MPC=Change in consumption/change in income. .75=Change in C/101-100 Change in C=.75*1 Change in C=.75 New consumption =60+.75=60.75

Suppose points F and G on the right-hand graph represent two possible outcomes for an imaginary economy in the year 2020, and those two points correspond to points C and D, respectively, on the left-hand graph. What does this imply that the price level in 2019 must have been? a. 115 b. 110.5 c. 100 d. 80.5

100

Assume the figure depicts possible outcomes for the year 2022. In 2022, the economy is at point A on the left-hand graph, which corresponds to point A on the right-hand graph. The price level in the year 2021 was... a. 144. b. 150. c. 152. d. 156.

150 explanation =[(Price in 2022- Price in 2021)/Price in 2021] *100 Let Price in year 2021 be x 4 = [(156- x)/x]*100 0.04x = 156-x x + 0.04x = 156 1.04x = 156 x = 156/1.04 x = 150

Consider an economy described by the following equations Y = C + I + G C = 100 + 0.75(Y-T) I = 500 -50R G = 125 T = 100 Where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and R is the interest rate. If the economy were at full employment (that is, at its natural rate) GDP would be 2000. Refer to scenario, suppose the central bank's policy is to adjust the money supply to maintain the interest rate at 4% (r = 4). Solve for GDP. How does it compare to the full employment level? a. 1600, less than full employment level. b. 1800, less than full employment level. c. 2100, greater than full employment level. d. 2000, exactly the full employment level.

1800, less than full employment level.

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then, the multiplier must be... a. 1.96 b. 3 c. 1.67 d. 2.5

2.5 explanation given MPC = 0.6 1/1-MPC 1/1-0.6 1/0.4 =2.5

Refer to scenario 1, assuming no change in fiscal policy, what interest rate would restore output to its natural level? a. 4% b. 2% c. 0% d. 3%

3%

Suppose the economy starts at 5% unemployment and 3% inflation and expected inflation remains at 3%. Which one of the following points could the economy move to in the short run if the Federal Reserve pursues a more expansionary monetary policy? a. 7% unemployment and 1% inflation b. 7% unemployment and 3% inflation c. 3% unemployment and 5% inflation d. 3% unemployment and 7% inflation

3% unemployment and 5% inflation

There is an excess supply of money at an interest rate of a. 3.25% b. 4.25% c. 5.25% d. 6.25%

5.25%

If the economy starts at 5% unemployment and 5% inflation then if the Federal Reserve pursues a contractionary monetary policy, in the short run the economy moves to.... a. 3% unemployment and 5% inflation. In the long run the economy moves to 5% unemployment and 5% inflation. b. 3% unemployment and 5% inflation. In the long run the economy moves to 5% unemployment and 3% inflation. c. 7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 5% inflation. d. 7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 3% inflation.

7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 3% inflation.

A decrease in Y from Y1 to Y2 is explained as follows: A. The Federal Reserve increases the money supply, causing the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2. B. An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2. C. A decrease in P from P2 to P1 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2. D. An increase in the price level causes the money-demand curve to shift from MD2 to MD1; this shift of MD causes r to decrease from r2 to r1; and this decrease in r causes Y to decrease from Y1 to Y2

An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then how much do government purchases have to increase in order to offset the $50 billion leftward shift? a. By $90 billion b. By $60 billion c. By $20 billion d. By $30 billion

By $20 billion explanation: MPC =0.6 Y = 1/1-MPC × G 50 = 1/1-0.6× G 50 = 1/0.4 × G 50/2.5 =G G = 20 billion.

An economy is operating with output that is $400 billion below its natural level, and fiscal policy makers want to close the recessionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. The MPC is 0.8, and assume the price level is completely fixed in the short-run. In what direction and by how much would the government funding need to change to close the recessionary gap? a. Government spending must increase by $80 billion. b. Government spending must increase by $2000 billion. c. Government spending must decrease by $80 billion. d. Government spending must decrease by $2000 billion.

Government spending must increase by $80 billion.

Monetary Policy in Mokania. Mokania has had inflation of 15% for many years. Mokania establishes a new central bank, the Bank of Mokania, with the hopes of reducing the inflation rate. Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However, its efforts made the unemployment rate rise by 10 percentage points for a year while output fell by 30 percent for a year. Which of the following is correct? a. Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 3. b. Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 1. c. Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 3. d. Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 1.

Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 3.

The short-run equilibrium is defined by the given AD and SRAS curves. Which LRAS curve would suggest that the economy is currently experiencing an expansionary output gap? a. LRAS1 b. LRAS2 c. LRAS3 d. Both LRAS1 and LRAS3

LRAS1

Scenario 33-1. Suppose that political instability in other countries makes people fear the value of their assets in these countries so they desire to purchase more U.S. assets. 5. Refer to Scenario 33-1. What would the resulting change in the exchange rate cause to happen to U.S. net exports and U.S. aggregate demand (IGNORE ANY IMPACT ON INVESTMENT OR THE INTEREST RATE)? a. Make net exports rise which by itself would increase U.S. aggregate demand. b. Make net exports rise which by itself would decrease U.S. aggregate demand. c. Make net exports fall which by itself would increase U.S. aggregate demand. d. Make net exports fall which by itself would decrease U.S. aggregate demand.

Make net exports fall which by itself would decrease U.S. aggregate demand.

A shift of the money-demand curve from MD2 to MD1 is consistent with which of the following sets of events? a. The government cuts taxes, resulting in an increase in people's desired consumption. b. The government reduces its expenditure. c. The Federal Reserve increases the supply of money. d. The Federal Reserve decreases the supply of money.

The government reduces its expenditure.

which of the following effects cause $1 of additional government expenditure to lead to more than a $1 increase in aggregate demand? a. The crowding out effect and the multiplier effect b. The crowding out effect but not the multiplier effect c. The multiplier effect but not the crowding out effect d. Neither the multiplier effect nor the crowding out effect

The multiplier effect but not the crowding out effect

The natural level of output is a. Y1. b. Y2. c. Y3. d. both Y1 and Y3.

Y2

Scenario 33-2Imagine that in the current year the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%. Refer to Scenario 33-2. Which curve shifts and in which direction? A. Aggregate demand shifts left. B. Aggregate demand shifts right. C. Aggregate supply shifts left. D. Aggregate supply shifts right.

aggregate demand shifts left.

According to the theory of liquidity preference, A. an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right. B. an increase in the interest rate increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand leftward. C. an increase in the price level reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand rightward. D. an increase in the price level increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand leftward.

an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right.

A policy that lowered the natural rate of unemployment would shift... a. both the short-run and the long-run Phillips curves to the left. b. the short-run Phillips curve left but leave the long-run Phillips curve unchanged. c. the long-run Phillips curve left but leave the short-run Phillips curve unchanged. d. neither the long-run Phillips curve nor the short-run Phillips curve left.

both the short-run and the long-run Phillips curves to the left.

Monetary policy a. must be described in terms of interest-rate targets. b. must be described in terms of money-supply targets. c. can be described either in terms of the money supply or in terms of the interest rate. d. cannot be accurately described in terms of the interest rate or in terms of the money supply.

can be described either in terms of the money supply or in terms of the interest rate.

Suppose an increase in investment causes falling unemployment and rising output. To counter this, the Federal Reserve would a. decrease government spending. b. decrease the money supply. c. increase government spending. d. increase the money supply.

decrease the money supply.

An increase in household saving out of disposable income causes consumption to a. rise and aggregate demand to increase. b. rise and aggregate demand to decrease. c. fall and aggregate demand to increase. d. fall and aggregate demand to decrease.

fall and aggregate demand to decrease.

Suppose the economy is in long-run equilibrium. If there is a shar increase in the minimum wage as well as an increase in taxes, then in the short run, real GDP will... a. rise and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be unaffected. b. fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be unaffected. c. rise and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower. d. fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower.

fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower.

During recessions, taxes tend to a. rise and thereby increase aggregate demand. b. rise and thereby decrease aggregate demand. c. fall and thereby increase aggregate demand. d. fall and thereby decrease aggregate demand.

fall and thereby increase aggregate demand.

Which of the following would not be directly included in aggregate demand? a. An increase in firms' inventories b. Purchases of goods by households c. Firms' purchases of newly produced machinery d. Government taxes and transfers.

government taxes and transfers.

The mathematical equation: quantity of output supplied = natural rate of output + an (actual price level - expected price level), expresses a. how the long-run equilibrium adjusts to changes in the money supply. b. how the quantity of output produced deviates in the short run from its natural level. c. how the short-run aggregate supply curve shifts. d. how adverse shifts in aggregate supply can cause stagflation.

how the quantity of output produced deviates in the short run from its natural level.

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment? a. Decrease the money supply b. Increase government expenditures c. Increase taxes d. Increase interest rates

increase government expenditures.

Which of the following policies would Keynesians support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium? a. Increase taxes b. Increase government expenditures c. Increase the money supply d. Lower interest rates

increase taxes

A shock increases the costs of production. Given the effects of this shock, if the central bank wants to return the unemployment rate toward its previous level it would a. increase the rate at which the money supply increases. This will also move inflation closer to its previous rate. b. increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate. c. decrease the rate at which the money supply increases. This will also move inflation closer to its original rate. d. decrease the rate at which the money supply increases. However, this will make higher than its previous rate.

increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate.

If the unemployment rate is below the natural rate, then, according to the short-run Phillips curve, a. inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift right. b. inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift left. c. inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift left. d. inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right.

inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right.

The Federal Reserve would want to tighten monetary policy with the goal is to stabilize the economy when a. interest rates are rising too rapidly. b. it thinks the unemployment rate is too high. c. the growth rate of real GDP is quite sluggish. d. it thinks inflation is too high today, or will become too high in the future.

it thinks inflation is too high today, or will become too high in the future.

If the expected price level rises, the SRAS curve shifts a. right, so that at any price level output is higher in the short run than before. b. left, so that at any price level output is higher in the short run than before. c. right, so that at any price level output is lower in the short run than before. d. left, so that at any price level output is lower in the short run than before.

left, so that at any price level output is lower in the short run than before.

One determinant of the natural unemployment rate is the a. market power of unions, while the inflation rate in the long run depends primarily upon government spending. b. minimum wage, while the inflation rate in the long run depends primarily upon the money supply growth rate. c. rate of growth of the money supply, while the inflation rate in the long run depends primarily upon the market power of unions. d. existence of efficiency wages, while the inflation rate in the long run depends primarily upon the extent to which firms are competitive.

minimum wage, while the inflation rate in the long run depends primarily upon the money supply growth rate.

If the economy is at O and there is a reduction in aggregate demand, in the short run the economy a. stays at O. b. moves to P. c. moves to Q. d. moves to R.

moves to R.

If there is an adverse supply shock and the Federal Reserve responds by increasing the growth rate of the money supply, then in the short run the Federal Reserve's action... a. lowers both inflation and unemployment. b. lowers inflation but raises unemployment. c. raises inflation but lowers unemployment. d. raises both inflation and unemployment.

raises inflation but lowers unemployment.

If inflation expectations rise, the short-run Phillips curve shifts... a. right, so that at any inflation rate unemployment is higher in the short run than before. b. left, so that at any inflation rate unemployment is higher in the short run than before. c. right, so that at any inflation rate unemployment is lower in the short run than before. d. left, so that at any inflation rate unemployment is lower in the short run than before.

right, so that at any inflation rate unemployment is higher in the short run than before.

Changes in the interest rate... a. shift aggregate demand whether they are caused by changes in the price level or by changes in fiscal or monetary policy. b. shift aggregate demand if they are caused by changes in the price level, but not if they are caused by changes in fiscal or monetary policy. c. shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level. d. do not shift aggregate demand.

shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level.

A tax cut shifts the aggregate demand curve the farthest right if... a. the MPC is large and if the tax cut is permanent. b. the MPC is large and if the tax cut is temporary. c. the MPC is small and if the tax cut is permanent. d. the MPC is small and if the tax cut is temporary.

the MPC is large and if the tax cut is permanent.

Assume there is a multiplier effect and some crowding out. An increase in government expenditures changes aggregate demand more if... a. the MPC is large and the influence of expenditure on money demand is weak. b. the MPC is small and the influence of expenditure on money demand is strong. c. the MPC is small and the influence of expenditure on money demand is weak. d. the MPC is large and the influence of expenditure on money demand is strong.

the MPC is large and the influence of expenditure on money demand is weak.

Monetary neutrality best describes a. the economy in both the long run and the short run. b. the economy in neither the long run nor the short run. c. the economy in the long run but not the short run. d. the economy in the short run but not the long run.

the economy in the long run but not the short run.

According to liquidity preference theory, if the price level decreases, then a. the interest rate falls because money demand shifts right. b. the interest rate falls because money demand shifts left. c. the interest rate rises because money supply shifts right. d. the interest rate rises because money supply shifts left.

the interest rate falls because money demand shifts left.

if it were the case that an increase in inflation permanently reduced unemployment, then that would mean... a. the money would not be neutral and the long-run Phillips curve would slope upward. b. the money would not be neutral and the long-run Phillips curve would slope downward. c. the money would be neutral and the long-run Phillips curve would slope upward. d. the money would be neutral and the long-run Phillips curve would slope downward.

the money would not be neutral and the long-run Phillips curve would slope downward.

Which of the following is not a determinant of the long-run level of real GDP? a. The price level b. The amount of capital used by firms c. Available stock of human capital d. Available technology

the price level

The government of Blenova considers two policies. Policy A would shift AD right by 500 units while policy B would shift AD right by 300 units. According to the short-run Phillips curve, policy A will lead a. to a lower unemployment rate and a lower inflation rate than policy B. b. to a lower unemployment rate and a higher inflation rate than policy B. c. to a higher unemployment rate and lower inflation rate than policy B. d. to a higher unemployment rate and higher inflation rate than policy B.

to a lower unemployment rate and a higher inflation rate than policy B.

If the economy is at the point where the short-run Phillips curve intersects the long-run Phillips curve, a. unemployment equals the natural rate and expected inflation equals actual inflation. b. unemployment is above the natural rate and expected inflation equals actual inflation. c. unemployment equals the natural rate and expected inflation is greater than actual inflation. d. there is no unemployment or inflation.

unemployment equals the natural rate and expected inflation equals actual inflation.